Biomass Trading Floor - Business Study%5B1%5D

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Wood Biomass Trading Floor Business Study

1


by

ENVIROMAC

and

SUSTAINABLE DEVELOPMENT BIOMASS RENEWABLE ENERGY

April 2010


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This report was completed by:

Angus Macpherson

Managing Director

Enviromac

Hudson House,

8 Albany Street

Edinburgh

EH1 3QB

Tel: (+44) 0131 473 2330

Fax: (+44) 0131 473 2326

Mob: (+44) 0780 133 7590

Steve Luker

Steve Luker Associates Ltd

7 DOUNE CRESCENT

NEWTON MEARNS

GLASGOW

G77 5NR

www.stevelukerassociates.co.uk

OFFICE: 0141 416 4230

MOBILE TEL: 07970 522160

EMAIL: [email protected]

SKYPE: steve luker

This report was commissioned by Forestry Commission Scotland for theRegional Biomass Advice Network (RBAN) , in partnership with Scottish

Government, Scottish Enterprise and Forest Research. RBAN is part-fundedby the European Regional Development Fund.


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Contents

Summary ........................................................................................................................................................ 5The purpose of the scoping study is to examine the issues associated with developing an internet based

woody biomass trading floor a market place. This builds on one of the recommendations of Wood Fuel

Task Force report published in 2008 and covers: ........................................................................................... 5

What is an internet based biomass trading floor? ........................................................................................ 5Some advantages of a biomass trading system .......................................................................................... 5What changes are happening that create a role for an exchange? .............................................................. 6Sector questionnaire ................................................................................................................................... 6Comparator review ...................................................................................................................................... 6Industry attitudes ......................................................................................................................................... 7Outline business plan .................................................................................................................................. 7Anticipated challenges ................................................................................................................................ 7The development of a trading floor and the next steps ................................................................................ 8

1.0 Introduction and context ............................................................................................................................ 91.1 Purpose and methodology .............................................................................................................. 91.2 EU renewable energy targets and the demand for wood ............................................................... 101.3 UK and Scottish context ................................................................................................................ 111.4 Summary and analysis of biomass use by 2020 ........................................................................... 13

2.0 Comparator review .................................................................................................................................. 192.1 Introduction ................................................................................................................................... 192.2 Objectives of websites................................................................................................................... 192.3 Location and materials .................................................................................................................. 20

3.0 Survey and industry attitudes .................................................................................................................. 223.1 Industry questionnaires ................................................................................................................. 223.2 Workshop ...................................................................................................................................... 263.3 Summary comments ..................................................................................................................... 273.4 Potential impacts on other sectors ................................................................................................ 283.5 Conclusion .................................................................................................................................... 29

4.0 A wood energy trading exchange ............................................................................................................ 304.1 Trading issues ............................................................................................................................... 304.2 How exchanges work .................................................................................................................... 314.3 Anticipated challenges .................................................................................................................. 334.4 Outline business plan .................................................................................................................... 33

5.0 Costed proposals for the development of a trading floor ......................................................................... 35Appendix 1: Market based use estimates ..................................................................................................... 37Appendix 2: Forecast of prospective users ................................................................................................... 39Appendix 3: List of companies surveyed ....................................................................................................... 44Appendix 4: Questionnaire and accompanying letter .................................................................................... 46Appendix 5: Websites surveyed. ................................................................................................................... 48


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Appendix 6: Woodfuel specifications ............................................................................................................ 49Appendix 7: Website ..................................................................................................................................... 50Appendix 8: Detailed breakdown of potential participants and number of market operators required ........... 57Index of figures:

Figure 1 EU wood use and supply by 2020 10Figure 2 UK renewable mix by 2020 11Figure 3 UK wood supply and use 2020 12Figure 4 Renewable heat targets in Scotland by 2020 12Figure 5 Forecast wood use UK 2020 13Figure 6 Forecast wood use Scotland 2020 13Figure 7 Estimated current wood energy use 14Figure 8 UK forecast of wood use 14Figure 9 Scottish forecast of wood use 15Figure 10 Buyers in the UK by 2020 15Figure 11 Buyers in Scotland by 2020 15Figure 12 Sellers in Scotland by 2020 15Figure 13 Sellers in Scotland by 2020 15Figure 14 Forecast of wood energy use 16Figure 15 Forecast of wood buyers and sellers 17Figure 16 Scottish wood energy use 17Figure 17 Scottish wood energy buyers and sellers 18Figure 18 Aspirations of identified websites 20Figure 19 Target markets of websites 20Figure 20 Materials traded 21Figure 21 Numbers of materials covered per website 21Figure 22 Would you use a biomass exchange? 22Figure 23 What materials should an exchange focus on? 23Figure 24 What type of biomass would you trade? 23Figure 25 Cause of disputes 24Figure 26 Volumes of sales 25Figure 27 Contract terms 25Figure 28 Worksop attendees 26Figure 29 Website front page 31Figure 30 Cost plan 36


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Summary

The purpose of the scoping study is to examine the issues associated with developing an internet based woody biomass

trading floor a market place. This builds on one of the recommendations of Wood Fuel Task Force report published in

2008 and covers:

An analysis of similar systems elsewhere

An assessment of industry attitudes to a biomass trading floor through face to face interviews, a workshop

and questionnaires.

An outline business plan for a biomass trading floor and key requirements for successful implementation.

Costed proposals for the delivery of trading floor to an operational level initially focusing on Central Scotland

What is an internet based biomass trading floor?

An internet based biomass trading floor is a forum through which buyers and sellers of biomass trade using a

common set of rules. As a result trading between multiple users is swift, simple and secure and enables buyers and

sellers to buy and sell at the best available prices. It increases trading flexibility, certainty and price transparency

which then becomes the benchmark for material availability. The internet provides real time transaction information

and allows the market place to be taken to the market rather than all market participants having to come to a single

physical location. Electronic communications provide an auditable trail of all transactions from order to final delivery.

The operation of a trading floor could be funded by a mixture of joining fees, annual subscriptions and transaction

fees. The costs of detailed development and the setting up of the trading floor will require at risk development funds

from the public and private sector.

Successful sites (trading other commodities) work because they achieve a critical level of liquidity, the scale of

transaction volumes and continuous demand and supply that are required to enable the trading site to achieve

credibility and to work sustainably. The size of the market is a crucial element in identifying whether or not a market-

place can achieve critical liquidity, as is the number of buyers and sellers. This critical level frequently takes between

5 and 7 years to achieve.

Some advantages of a biomass trading system

Trading standardised contracts and reporting their traded price and volume creates price transparency

which informs and potentially stimulates new or uncertain market entrants.

Common rules provide a level playing field for all businesses large or small introducing the ability to trade

flexibly at a low cost based on equal market knowledge.

The regulated environment provides a template for dispute resolution.

The use of standardised contracts allows a transparent transaction price to be developed.

The participation criteria for an exchange can be used to raise standards.


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Allows the development of trading forward and future contracts which provide both counter-parties with

certainty of price and volume at a known date in the future.

What changes are happening that create a role for an exchange?

The regulatory drive towards biomass within the Renewables Obligation and the Renewable Heat Incentive suggest

that the demand and supply patterns of biomass and wood energy products in particular will both change and

increase significantly over the next decade. In the United Kingdom there could be a supply shortfall of 22 million

tonnes pa, which represents 55% of total forecast wood use. As a result the sector is looking for a forum in which to

be able to focus demand and supply, identify distribution imbalances, maintain quality standards and encourage new

entrants

Sector questionnaire

In July 2009 we issued a letter and questionnaire to 51 companies identified as potential buyers or sellers of wood

biomass in Scotland. We obtained 25 replies and 20 competed questionnaires. The results showed:

50% could see benefits of a biomass trading f loor and would use it to buy or sell.

A trading mechanism for more than just clean wood was preferred.

Wood chips followed by pellets followed by logs were the commodities most likely to be traded.

Quality was the most frequent cause of disputes.

A third of respondents traded less than 1,000 tonnes a month, 11% traded in excess of 25,000 tonnes.

A variety of contracts were used for trading with bespoke the most frequent.

As anticipated it was apparent that for many businesses a biomass trading system was little understood.

Comparator review

A rapid comparator review was carried out on sixteen websites in Asia, Europe and USA, operating on regional,

national and international basis. It established that:

there were information and introduction/matching sites

there are no established biomass trading floors. Although some websites and publications produce biomass

price indices, real time trading is not available to the sector at present.

sites covered a range of biomass products with pellets and woodchips being the most popular and

sometimes provided a list of suppliers


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Industry attitudes

We followed up the questionnaire with a series of face to face interviews1

and we held a workshop on 5th

October

2009 which was attended by a range of the consulted companies and other interested parties.

The results of this process established that the (wood energy) sector did not have any fundamental concerns over the

concept of a biomass trading system and in some cases there was considerable enthusiasm. At the workshop and

during the interviews we found that most companies expressed a willingness to consider using a trading system

alongside their current methods of buying or selling biomass.

Outline business plan

Initially the biomass trading floor would provide market places for 3 commodities:

Conditioned woodchips for the heat market.

Low grade wood chips for the power market.

Pellets for both the heat and power market.

Its creation would be split into 3 phases:

Phase 1: Development of the trading database 6 months

Phase 2: Operation of the prototype 18 months

Phase 3: Achieving critical liquidity 36 to 60 months

To succeed the exchange will need to attract a critical number of buyers and sellers and traded volume - liquidity. At

a minimum this would be sufficient for the exchange to be financially sustainable.

Anticipated challenges

The development of trading floor would need to overcome a series of challenges, these include:

The trading floor being considered a threat rather than an ally by the sector.

The participation criteria being too onerous.

These challenges can be overcome by effective consultation prior to launch, the development of an efficient

operational (IT) system and on-going communication and marketing post launch. While integrity and confidentiality

are critical at all times, the most important skill at launch is an effective marketing campaign.

1With: Dan Gates Econergy Ltd, Gordon Callander Callander Sawmills, Paul Cookson Sustainable Wood Solutions, Alan Massey

Buccleuch Natural Fuels, George Webb Norbord, Ross Cook/Robert Leask Procurement Scotland, Iain MacKinnon/Trevor

Jackson Charlesfield, Deborah Keedy Drax Biomass Procurement Manager.


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The development of a trading floor and the next steps

The development of a trading system requires significant resources to be deployed to achieve liquidity and in

particular over the initial 2 to 3 years. It is envisaged that the prototype phase would be free to participants to

encourage take up. In time confidence in the system would increase sufficiently to establish trading volumes that

would be high enough to introduce fees and ultimately make the system self sustaining. Experience from launching

previous trading floors suggests that this might take several years. The table below shows a potential spend profile2

over years 1 to 3.

Year 2010 2011 2012

1 2 3 Total

Income to trading platform 0.00 0.00 125,000 75,000

Running costs 225,000 200,000 200,000 625,000

Deficit -225,000 -200,000 -75,000 -500,000

% market traded through market

place

0. 5% 1.2% 2.96%

Tonnes of biomass traded 20,000 50,000 150,000

Employees 2 4 4 4

The development of a trading platform could require funding over a number of years and in a prudent scenario as

shown above 500,000 of support funding in the first 3 years. A decision to close or significantly alter the project

could be made after year 2. Overall it is anticipated the cost of reaching a liquid market is in the region of 1.1 million

over 7 years. This might be partially secured through SRDP, KTP or EU funds3. This requires further investigation.

Private sector finance support could contribute to these costs as well. If liquidity is achieved these funds could be

repaid by year 10. It should be noted that no provision in these figures has been made for inflation.

Initially it is anticipated given the potential size of the heat market in particular that a project manager and a team of

three market developers would be required. While it is possible to reduce or combine employment roles for reasons

of financial expediency, to do so increases the risk that the period to achieve critical liquidity either takes longer or is

never achieved. The cost could also be reduced (or income generated earlier) if once it is developed, the sector

committed early to trading contracts through the trading platform.

2Spread over 3 years: IT Set up costs 75,000, Employment costs 412,500, Overheads 137,500 (including Project Overview,

Marketing, Legal, Administration, Settlement, Accounting and IT support, Accommodation, Telephones, Travel, etc)3

Scottish Rural Development Programme, Knowledge Transfer Project and European Union


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1.0Introduction and context

1.1 Purpose and methodology

The purpose of the scoping study is to examine the issues associated with developing an internet based biomass

trading floor a market place. This builds on one of the recommendations of Wood Fuel Task Force report published

in 2008. In detail the scoping study is to:

1. Carry out a survey on the potential of a biomass trading floor in Scotland looking specifically at how a trading

floor would:

help create greater transparency in the market;

promote trading of standardised biomass products and identify the most suitable forms of biomass that

could be traded.

support forward/future markets for biomass products.

monitor trends in feedstock sourcing and provide a reporting system on usage

encourage long term relationships;

provide a role model / mentoring opportunity for advice between businesses from existing to new and

pre-start up.

assist new suppliers and end users in entering the woodfuel market

identify potential barriers to suppliers using the trading floor and suggest how these barriers could be

addressed

aid in conflict resolution around fuel specifications, quantities and other potential issues

2. Identify similar trading systems currently in place trading biomass and how they could be used to develop a

similar system in Scotland.

3. Assess industry attitudes to a biomass trading system by a suitable survey. This should be Scotland-wide,

involving as many companies as feasibly possible whilst taking into account the budget for the project.

4. Produce an outline business plan for a successful biomass trading floor and key requirements for successful

implementation.

5. Produce costed proposals for the delivery of the trading floor to an operational level initially focusing on Central

Scotland.

The successful development of a biomass trading floor will need the support and participation of both buyers and

sellers. We have assessed industry attitudes to a biomass trading system by a questionnaire, which was sent by e-

mail and hard copy and followed up by e-mail and telephone, a workshop open to those e-mailed and other interested

parties and face to face interviews. As anticipated, it was apparent from an early stage that for many in the sector the

concept and advantages of a biomass trading system were little understood.


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The feedback from the sector was analysed and knowledge of the current and potential size of the market was used

to develop an outline business plan and costed proposals.

1.2 EU renewable energy targets and the demand for wood

The size of the market is a critical element in identifying whether or not a trading floor can achieve critical liquidity, as

is the number of potential buyers and sellers. There are a number of regulatory changes which suggest that the

demand and supply patterns will both change and increase significantly over the next decade which stimulated the

recommendation by the Wood Fuel Task Force to investigate the development of an internet based trading floor. This

part of the report provides a rapid appraisal forecast of the growth of traded volumes.

The EU has recently set challenging targets for the increased use of renewable energy by 2020.

In overall terms renewable energy must meet 20% of total energy use by 2020 (rising from the 2005 use of 8.5%).

This overall target is expressed in different ways in each member state and for that reason it is not possible to

determine a precise target for the use of wood in meeting this target. However at present 58% of the EUs renewable

energy comes from wood. It can be assumed this percentage will fall to 44%4

by 2020 as the relative share of other

renewable technologies will grow to meet the 2020 renewables targets.

Based upon this assumption the table that follows shows the EU wide forecast5

use of wood in millions of cubic

metres for the year 2020. The use of wood for energy at 538 million cubic metres6

is based on meeting stated

renewable energy targets in each member state. The use of wood for existing markets at 523 million cubic metres

is based on the European Forest Sector Outlook Study (EFSOS) in each member state, as is the total forecast supply

of wood all for the year 2020.

Figure 1 EU wood use and supply by 2020

4UNECE report March 2008: Wood resources availability and demands II: future wood flows in the forest and energy sector

5UNECE report March 2008: Wood resources availability and demands II: future wood flows in the forest and energy sector

6One green tonne of wood chips is about equal to one cubic metre of wood.


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By 2020 this forecast predicts that there will be deficit of 237 million cubic metres of wood, 22.34% of the total

forecast wood demand, in the EU. In 2005 the existing wood energy market was around 332 million cubic metres, (in

2020 it is forecast to be 538 million cubic metres) so the main cause of the forecast deficit is a significant increase in

the use of wood for energy driven by the renewable energy targets.

1.3 UK and Scottish context

At the UK and Scottish level a number of incentives, targets and policies will affect the use of wood for energy.

The proposed Renewable Heat Incentive is a new financial support mechanism that will be created for renewable

heat projects. It is a UK national scheme driven by UK Government to be introduced by April 2011. It comprises a

payment to generators of renewable heat, the payment will reflect the amount of renewable heat generated in

KW\MW hours. This should increase the demand for wood chips and pellets for heating.

The UK Renewable Energy Strategy proposes that renewable energy should rise from 1.5% in 2006 to 15% by 2020.

The breakdown of this is shown below. Biomass heat, electricity and co-firing total 19% of this. In very approximate

terms this is equal to an annual use of 25 million tonnes of wood biomass (green)

Figure 2 UK renewable mix by 2020

It is very difficult to obtain reliable forecasts on the use of wood energy. This is illustrated by the fact that the UK

Renewable Energy Strategy mentioned above is not consistent with the UNECE report March 2008: Wood resources

availability and demands II: future wood flows in the forest and energy sector.

Using the UNCE report the table below shows that by 2020 the UK will have a demand for wood of 42 million cubic

metres, but a supply of 20 million cubic metres. The forecast defecit is therefore 22 million cubic metres or 55%

of the total forecast demand. This is a signficantly worse situation than for the EU as a whole and suggests the UK

will require more than twice as much wood as it can produce to meet its renewable energy targets. This appears to


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be an unsustainable position. It would be made worse by the overall EU position, as these markets will also need

more wood than they can supply thus creating demand for exports at the same as domestic demand is massively

exceeding supply

Figure 3 UK wood supply and use 2020

The UNCE figures are based upon a whole range of assumptions - notably that renewable energy targets are met. As

noted they are also not consistent with other published data sources. However they do indicate that the availability of

wood for energy will reduce and the demand for wood for energy will rise. This suggests a trading platform would

have a valuable role going forward.

In Scotland the 2009 Scottish Government Renewable Action Plan offers an explicit short term target and this means

170 commercial scale wood energy schemes should be installed in the next 2 years. This is based upon meeting the

2% interim milestone for renewable heat in 2011 (and that wood remains at the 90% share of that).

In August 2009 the Climate Change (Scotland) Act 2009 received Royal Assent and established an 80% emissions

reduction target by 2050. This has been characterised as the largest legally binding reduction target any Country has

ever set. As a result Councils now appear legally obliged to reduce their emissions from 2010.

The table below shows an estimate of the capacity, number and investment cost of wood energy schemes that would

be required each year and in total to meet the current Scottish renewable energy heat target (the range results from

how it is assessed).

Target to 2020 Million

tonnes pa

wood use

Installed

capacity

Total

investment

Millions

Annual no. of

schemes

Scottish heat low 2.0 m tonnes 2,500MW 1,500 M 500 (150 M pa)

Scottish heat high 3.9 m tonnes 4,875MW 2,900 M 975 (290 M pa)

Figure 4 Renewable heat targets in Scotland by 2020


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The overall importance of wood energy as part of renewable energy, the fiscal drivers and policy targets indicate that

at EU, UK and Scottish levels wood energy will be traded in ever greater volumes over the next 10 years.

1.4 Summary and analysis of biomass use by 2020

The scope of this study precludes a detailed and comprehensive examination of biomass use7; however using our

professional judgement we suggest a low medium and high forecast for wood biomass use now and to 2020.

To help develop these forecasts we have compiled a simple snap shot of existing, planned and announced biomass

projects in Scotland: this shows that potential demand could rise to over 8.6 million tonnes pa. These figures are

presented in detail in Appendix 1. This snap shot contains projects that have been announced but of course may

not end up being built.

The other forecasts presented in earlier sections of this report show different estimates of forecast biomass use and

the table that follows summarises the range of biomass use forecasts that we have identified as part of developing

this report.

Region Heat Power Total use Comments

UK 29M UNCE report

UK 20M Hawkins Wright from announcements

UK 11M Unattributed

UK 34.5M Unattributed

UK 20M 5M 25M UK RES

Figure 5 Forecast wood use UK 2020

Region Heat Power Total Use Comments

Scotland 1M Climate change programme

Scotland 3.9M Scottish heat (high)

Scotland 2M Scottish heat (low)

Scotland 2M 0.5M 2.5M UK RES using population proxy

Figure 6 Forecast wood use Scotland 2020

All these forecasts represent an unprecedented growth in biomass use from the current use of biomass of about

3.25 million tonnes a year (UK wide).

7This is a large task and is probably required on an Industry agreed basis in any event


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A breakdown of current estimated wood biomass use is shown below:

Estimated current wood fuel use - UK8

User Amount in Millions of tonnes (green)

Heat Users 0.2 million tonnes

Co-firing 0.2 million tonnes

Pellet makers 0.52 million tonnes

CHP 1.02 million tonnes

Power 1.31 million tonnes

Total 3.25 million tonnes

Figure 7 Estimated current wood energy use

The growth in biomass use from around 3.25 million tonnes per annum to anywhere between 11 million to 34.5

million tonnes per annum over 10 years is suggested by policy objectives. However we view such growth as

extremely optimistic and clearly out of line with the available resources from forestry and recycled wood. It is only

possible to meet them by accessing currently untapped supply such as very high levels of imports and massive new

planting of energy crops and by providing a dramatically new environment to encourage high levels of capital

investment.

Therefore for the business planning purposes of this report we have produced a much more cautious low, medium

and high forecast table of biomass use and the numbers of buyers and sellers.

This is intended to illustrate a range of biomass use in total for the UK and Scotland and provides a framework to

consider how a trading platform might develop. The forecast use is much lower than in the preceding tables primarily

because we consider the policy targets are not likely to be met, not all announced projects will be developed and

biomass resources will constrain growth.

If market growth is higher the development costs of the trading platform could be lower than estimated in this report

(as the traded volumes could be higher but so could the numbers of buyers and sellers that require to be serviced

which would increase the costs).

UK Heat Power Total use

Low 1M 6M 7M

Medium 4M 6.5M 10.5M

High 8M 10M 18M

Figure 8 UK forecast of wood use

8These figures are our estimates and exclude imported non woody biomass


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Scotland Heat Power Total use

Low 0.3M 1.5M 1.8M

Medium 1M 4M 5M

High 2M 8M 10M

Figure 9 Scottish forecast of wood use

UK Heat Power

Woodchips Pellets Woodchips Pellets

Low 940 60 56 4

Medium 3,784 242 62 4

High 7,520 480 94 6

Figure 10 Buyers in the UK by 2020

Scotland Heat Power


Low 240 60 11 1

Medium 800 200 37 3

High 1,600 400 74 6

Figure 11 Buyers in Scotland by 2020

UK Heat Power


Low 188 12 56 4

Medium 756 48 62 4

High 1,504 96 94 6

Figure 12 Sellers in Scotland by 2020

Scotland Heat Power


Low 48 12 12 0

Medium 160 40 38 4

High 320 80 74 6

Figure 13 Sellers in Scotland by 2020

Our judgement is that the medium forecast is most probable for both the UK and Scotland. This is explored in a little

more detail below.


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UK Medium forecast in Thousands of Tonnes by 2020

The table below is a forecast of annual biomass use to 2020. The key assumptions are:

Relative size of the heat and power markets in the UK is 38% and 62% of the total market respectively and

remains constant

6% of both markets are supplied by pellets and this remains constant as each market grows.

The relative source of supply is split 90%:10% of overall supply in 2010 between domestic and imports

(excluding Drax) and changes on a straight line variation year on year to 50%:50% of total supply by 2020.

The average buyer of chips and pellets for the heat market buys 1,000 tonnes per annum. The average

seller or importer of chips or pellets sells 5,000 tonnes per annum.

The average buyer, seller or importer of chips and pellets for the power market turns over 100,000 tonnes

per annum.

UK Heat 38% Power 62% Total Domestic Import

'000 tonnes Chips Pellets Total Chips Pellets Total '000tonnes

perannum

Year 94% 6% 100% 94% 6% 100%

2010 1,160.90 74.10 1,235.00 1,894.10 120.90 2,015.00 3,250 2,925.00 90.00% 325.00 10.00%

2011 1,276.99 81.51 1,358.50 2,083.51 132.99 2,216.50 3,575 3,074.50 86.00% 500.50 14.00%

2012 1,462.02 93.32 1,555.34 2,385.40 152.26 2,537.66 4,093 3,356.26 82.00% 736.74 18.00%

2013 1,647.05 105.13 1,752.18 2,687.29 171.53 2,858.82 4,611 3,596.58 78.00% 1,014.42 22.00%

2014 1,832.08 116.94 1,949.02 2,989.18 190.80 3,179.98 5,129 3,795.46 74.00% 1,333.54 26.00%

2015 2,017.11 128.75 2,145.86 3,291.07 210.07 3,501.14 5,647 3,952.90 70.00% 1,694.10 30.00%

2016 2,202.14 140.56 2,342.70 3,592.96 229.34 3,822.30 6,165 4,068.90 66.00% 2,096.10 34.00%

2017 2,311.98 147.57 2,459.55 3,772.17 240.78 4,012.95 6,472.50 4,012.95 62.00% 2,459.55 38.00%

2018 2,421.82 154.58 2,576.40 3,951.38 252.22 4,203.60 6,780 3,932.40 58.00% 2,847.60 42.00%

2019 3,027.27 193.23 3,220.50 4,939.23 315.27 5,254.50 8,475 4,576.50 54.00% 3,898.50 46.00%

2020 3,784.18 241.54 4,025.72 6,174.18 394.10 6,568.28 10,594 5,297.00 50.00% 5,297.00 50.00%

Figure 14 Forecast of wood energy use

UK Heat Power

Year Chips Pellets Chips P

'000tonnes

perannum

Buyers

Sellers Importers

Buyers Sellers Importer s

Buyers Sellers Importer s

Buyers Sellers Importers

1 5 5 1 5 5 100 100 100 100 100 100

2010 1,161 209 23 74 13 1 19 17 2 1 1 0

2011 1,277 220 36 82 14 2 21 18 3 1 1 0

2012 1,462 240 53 93 15 3 24 20 4 2 1 0

2013 1,647 257 72 105 16 5 27 21 6 2 1 0

2014 1,832 271 95 117 17 6 30 22 8 2 1 0

2015 2,017 282 121 129 18 8 33 23 10 2 1 1

2016 2,202 291 150 141 19 10 36 24 12 2 2 1

2017 2,312 287 176 148 18 11 38 23 14 2 1 1

2018 2,422 281 203 155 18 13 40 23 17 3 1 1


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2019 3,027 327 279 193 21 18 49 27 23 3 2 1

2020 3,784 378 378 242 24 24 62 31 31 4 2 2

Figure 15 Forecast of wood buyers and sellers

Scottish Medium forecast for biomass use

The starting point is that current use of biomass is about 1 million tonnes a year and this will grow to 5 million tonnes

by 2020. The key assumptions are:

Relative size of the heat and power markets in Scotland is 20% and 80% of the total market respectively and

remains constant.

10% of the total market is supplied by pellets and this remains constant as each market grows. By tonnage

expansion into the power market increases at a ratio of 3:2 in comparsion to the heat market.

The relative source of supply is split 90%:10% of overall supply in 2010 between domestic and imports and

changes on a straight line variation year on year to 50%:50% of total supply by 2020.

The average buyer of chips and pellets for the heat market buys 1,000 tonnes per annum. The average

seller or importer of chips and pellets to the heat market sells 5,000 tonnes per annum.

The average buyer, seller or importer of chips and pellets for the power market turns over 100,000 tonnes

per annum.

Scotland Heat 20% Power 80% Total Domestic Import

'000tonnes

Chips Pellets Total Chips Pellets Total '000 tonnesper annum

Year 80% 20% 100% 92.5% 7.5% 100%

2010 160.00 40.00 200.00 740.00 60.00 800.00 1,000.00 900.00 90.00% 100.00 10.00%

2011 192.00 48.00 240.00 888.00 72.00 960.00 1,200.00 1,032.00 86.00% 168.00 14.00%

2012 224.00 56.00 280.00 1,036.00 84.00 1,120.00 1,400.00 1,148.00 82.00% 252.00 18.00%

2013 272.00 68.00 340.00 1,258.00 102.00 1,360.00 1,700.00 1,326.00 78.00% 374.00 22.00%

2014 320.00 80.00 400.00 1,480.00 120.00 1,600.00 2,000.00 1,480.00 74.00% 520.00 26.00%

2015 400.00 100.00 500.00 1,850.00 150.00 2,000.00 2,500.00 1,750.00 70.00% 750.00 30.00%

2016 480.00 120.00 600.00 2,220.00 180.00 2,400.00 3,000.00 1,980.00 66.00% 1,020.00 34.00%

2017 560.00 140.00 700.00 2,590.00 210.00 2,800.00 3,500.00 2,170.00 62.00% 1,330.00 38.00%

2018 640.00 160.00 800.00 2,960.00 240.00 3,200.00 4,000.00 2,320.00 58.00% 1,680.00 42.00%

2019 720.00 180.00 900.00 3,330.00 270.00 3,600.00 4,500.00 2,430.00 54.00% 2,070.00 46.00%

2020 800.00 200.00 1,000.00 3,700.00 300.00 4,000.00 5,000.00 2,500.00 50.00% 2,500.00 50.00%

Figure 16 Scottish wood energy use


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Scotland Heat Power

Year Chips Pellets Chips Pellets

'000tonnes

perannum

Buyers Sellers Importers Buyers Sellers Importers Buyers Sellers Importers Buyers Sellers Importers

1 5 5 1 5 5 100 100 100 100 100 100

2010 160 29 3 40 7 1 7 7 1 1 1 0

2011 192 33 5 48 8 1 9 8 1 1 1 0

2012 224 37 8 56 9 2 10 8 2 1 1 0

2013 272 42 12 68 11 3 13 10 3 1 1 0

2014 320 47 17 80 12 4 15 11 4 1 1 0

2015 400 56 24 100 14 6 19 13 6 2 1 0

2016 480 63 33 120 16 8 22 15 8 2 1 1

2017 560 69 43 140 17 11 26 16 10 2 1 1

2018 640 74 54 160 19 13 30 17 12 2 1 1

2019 720 78 66 180 19 17 33 18 15 3 1 1

2020 800 80 80 200 20 20 37 19 19 3 2 2

Figure 17 Scottish wood energy buyers and sellers


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2.0Comparator review

2.1 Introduction

A comparator review was carried out of 16 websites, which are listed at Appendix 5.

It established that there are no already established biomass trading floors trading standardised contracts, of the 3sites that aspired to do so one has yet to launch a contract, although it stated an intention to do so in October 2008,

one was launched in 2005 but appears moribund and one has closed. These are 5 websites (and sector publications)

which produce biomass price information in the form of indices these are primarily focused on wood pellets, but real

time trading is not available to the industry at present.

2.2 Objectives of websites

After evaluation of these existing sites we were able to breakdown the main objectives of each into 4 categories:

Introduction/Matching

These sites either take the form of trade association websites listing potential buyers and sellers of biomass

material or allowed users to place advertisements in the sites stating what they had available or wanted.

Once the introduction had been made the website took no further responsibility for the transaction and had

no method of either reporting or validating that a transaction had taken place. Hence they were unable to

create any price or volume information. As a generality those sites that allowed advertisements to be placed

appeared to be poorly managed without any time limit placed on advertisements or a requirement for

advertisements to be either refreshed or removed when they were no longer up to date.

Index

These sites are trying to create credible pricing indices. These are a useful tool with which to benchmark

prices and are widely used in many commodity markets. However the major problem about indices is that

you cannot trade through an index and frequently there are suggestions of price manipulation. Trading floors

are the only location where you have confidence that a price is a transaction price and that you are buying

or selling at the best available price at that time.

Transaction

These are sites with standardised rules for trading with all participants in the market.

Brokerage

These are sites through which trading can take place with any individual broker, who are trading on their

own account. Although these may show prices they are solely the best available price available from that

broker at that time necessitating a potential buyer or seller to do further research to identify the best

available price in the market at any time. Brokers can offer bespoke contracts while these offer flexibility

they also increases the likelihood of dispute or default.


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Figure 18 Aspirations of identified websites

2.3 Location and materials

The identified websites operated in Asia, Europe and the United States of America. Only one, EDF, claimed to

operate in more than one continent. In Europe the majority aspired to provide a service to the whole of Europe rather

than a single nation or region. Whereas in the United States they preferred to cover a state or a region rather country

wide. The same applied in Asia. None of the sites were particularly easy to identify a search via google identifies

only 2 in the top 10 links for Biomass Trading Floor and none seemed to particularly busy or successful from a

trading perspective.

Figure 19 Target markets of websites


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Figure 20 Materials traded

Apart from those that specialised in pellets all websites covered more than one biomass material with the majority

covering at least three.

Figure 21 Numbers of materials covered per website


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3.0Survey and industry attitudes

3.1 Industry questionnaires

We consider it likely that organisations like Councils, the NHS and Educational Institutes are not going to be early

participants in trading platform as they often buy heat and other services rather than just buying biomass. We

anticipate that the following will be more likely to be early entrants to a biomass trading system:

Specialist woodfuel suppliers

Sawmills

Forestry Management Companies

Wood Pellet Mills

Wood Recycling companies

Energy Utility companies

Biomass installers

Rural estates, farmers and forestry landowners

Haulage contractors

Pallet suppliers

Therefore we assessed their attitudes to a biomass trading system via a letter and questionnaire issued in July 2009.

A full list of the 51 companies we contacted is shown in Appendix 3. The letter and questionnaire were initially sent by

email. They were followed up with a postal copy, then chased up by email prompting returns and finally by telephone.

The questions were open allowing respondents to give opinions as well as simple yes and no answers. We obtained

25 replies and 20 competed questionnaires (a 50% response rate from the sector). The charts below show a

summary of the survey results.

Figure 22 Would you use a biomass exchange?

50% indicated that they would use an exchange to buy or sell biomass. Unfortunately of those that did not respond

positively most did not indicate whether it was the lack of benefit perceived that would restrict their willingness to


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trade or whether they would not trade under any circumstances. One responder said that they liked the idea of

guaranteed payments. Another suggested that it would maximise the amount of biomass products being utilised.

Figure 23 What materials should an exchange focus on?

The majority of those that responded wished more than clean wood to be traded through the exchange.

Figure 24 What type of biomass would you trade?


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There was a wide diversity of materials that those who responded wished to be traded through the exchange. This

reflects information gathered from the comparator review which showed a wide diversity of materials being traded/of

interest, although in our review woodchips were of greater interest than pellets. However while from one perspective

this is encouraging from another it creates potential challenges because it fragmentises the market.

At an early stage it was identified that only the trading of wood chips for both the heat and power (and potentially

chipboard) markets and pellets are feasible at this stage within standardised contracts through a biomass trading

floor as they have commonly accepted and used specifications9

for them.

Other biomass would require a different, less standardised trading system probably closer to an introduction arena.

Such a system could be developed but it would need to be in a parallel with trading standardised contracts.

Figure 25 Cause of disputes

The most frequent cause of dispute is the quality of the chip. This might be partially attributed to the specification not

being understood by both buyer and seller. It may also relate to the time when the quality is checked or how the

quality is checked. For example if quality is checked purely on heat output then it may be part of the heat process that

is operating inefficiently rather than the quality of the chips. Further investigation is needed. This is an area on which

a trading floor will need to focus at all levels, specification, measurement and validation to minimise the potential for

disputes.

9See Appendix 6


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Figure 26 Volumes of sales

The survey probably accurately reflects todays wood biomass sector in Scotland. While the largest number of those

that responded came from the sub-1,000 tonne a month group, the majority of both buyers and sellers are handling

more than 12,000 tonnes per month which probably correctly suggests that the Scottish biomass market is currently

focused on the power market.

Figure 27 Contract terms


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This shows that there are a wide range of contracts used to trade biomass which have been developed to reflect

individual circumstances. While this shows willingness, and possibly pragmatism, within the sector to adapt to meet

customer requirements, the impact of this variety is to obfuscate prices. As a consequence the true price, supply or

demand for biomass is far from clear for either investors or new entrants. This creates a potential barrier to

investment or entry.

3.2 Workshop

To augment the questionnaires a workshop was held in Glasgow on 5th

October 2009. The attendees are listed

below. We are very grateful for the time and effort of these attendees.

Company Forename Surname

Reith Partners (Woodfuel) Ltd Jamie Reith

Sustainable Wood Solutions Paul Cookson

Callendar Estate Guy Wedderburn

Health Facilities Scotland John Dunlop

RTS Wood Fuel Iain Stewart

Scottish Renewables Daniel Borisewitz

Wood Recyclers Association Peter Butt

Forestry Commission Scotland Virginia Harden

Steve Luker Associates Ltd Steve Luker

The Environment Exchange Angus Macpherson

Figure 28 Worksop attendees

The workshop provided a forum to offer views on the idea of trading platform. This was augmented with face to face

meetings with the following, who we would also like to express our thanks to:

Dan Gates Econergy Ltd,

Gordon Callander Callander Sawmills,

Paul Cookson Sustainable Wood Solutions,

Alan Massey Buccleuch Natural Fuels,

George Webb Norbord,

Ross Cook/Robert Leask Procurement Scotland

Iain MacKinnon/Trevor Jenkins Charlesfield

Deborah Keedy Drax Biomass Procurement Manager.


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3.3 Summary comments

During the questionnaire, workshop and interview process we obtained a number of specific comments. Answers are

shown where appropriate. These are summarised below:

It is possible to purchase and trade roundwood and standing timber already?

Yes. The Forestry Commission runs such a site. However none of the identified sites operate a contract

based multiple transaction forum.

How would an exchange comply with public sector tender needs under OJEU for example?

Public Sector organisations use other exchanges. An exchange provides a multiple tendering forum in which

a buyer or seller can get the best available price at any time. The limitation of tenderers is only imposed by

the participation criteria.

An exchange may offer a place for buyers and sellers to gain market\price information.

Correct. It will.

Long term power contracts and heat supply agreements are most common.

Correct. However very rarely are these contracts inclusive of a long term market price. An exchange will

provide the facility for allowing contracted partners to buy and sell biomass at a known price for a known

quantity to be delivered at a known time in the future.

Complex bespoke contract terms are required and may not fit in an Exchange.

Correct. Complex bespoke contracts are not suited to trading through an exchange. However one aspect of

any biomass contract will be the biomass price. It is this that can be secured through the exchange. As a

consequence the overall contract could become less complex and more secure.

Need to measure carbon and sustainability factors.

These can either be assumed to be factored into the price or can be included in the participation criteria

while remaining mindful that these should not be made so onerous that participants are unable to join.

A wood fuel association is a better step

The development of a wood fuel association is a potential concurrent activity and some of the websites

identified appear to be aspiring to that destination. On many occasions the development of the trading rules

in an exchange is done by an external organisation such as a trade association.

Dispute resolution is interesting, Quality Assurance is important and the area where most fuel supply

problems occur. Quite subjective, unless following say the new CEN Standard. But who decides?

Quality is a very important issue. It needs to be identifiable, measurable and verifiable. This an area which

will require further research prior to the launch of the exchange however at all times it must be remembered

that although the exchange may wish to lead the sector in dispute resolution in this area ultimately it must

reflect the needs and accepted norms of the market.


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There are several proposed biomass indexes. These are being developed by the private sector and a race

is developing as to which one will be become the accepted price index. It will probably be focussed on

pellets initially.

This comment has been confirmed by the website analysis.

How do we allow for green miles and the carbon impact of travel distance?

As previously these can either be assumed to be factored into the price or can be included in the

participation criteria while remaining mindful that these should not be made so onerous that participants are

unable to join.

Can we include turn around time in the contract

There is no reason why it should not be included and it would appear sensible to do so. However as stated

previously at all times it must be remembered that although the exchange may wish to lead the sector in

dispute resolution in this area ultimately it must reflect the needs and accepted norms of the market.

Should it be Scottish only suppliers?

While it can be limited there is a crucial balance to be achieved between limitation of potential participations

and achieving critical liquidity. It may also be difficult to define Scottish suppliers.

The recycled wood specification needs clarifications

This may restrict the ability for it to be traded through an anonymous website. However ultimately the

specification only needs to reflect the requirements and accepted norms of the market.

How do we ensure sustainability in the feed stock supply?

This could be included in the participation criteria. Further guidance would be required on what was desired

and acceptable.

Should we include logs at roadside?

This is a possibility once an acceptable contract for trading has been developed.

Is this to be seen as an extension of the on-line tendered site currently operated by the Forestry

Commission who would run and operate the Exchange and what incentives to abandon the old ways?

No the indications are that the Forestry Commission wish the development of the Exchange to be

independent from them. The Exchange operator has not as yet been appointed. It has been suggested that

an eighteen month period without trading fees should be used to encourage the sector to abandon old ways.

3.4 Potential impacts on other sectors

There was little discussion on the potential impact on other sectors of the development of a biomass trading

exchange. The majority of discussion was focused on the impact on the timber market as a whole of the

introduction of the renewable heat incentive and how the biomass market might reduce the quantity of

material available for other uses within the timber industry. If this were to occur an economist would suggest


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that timber prices would rise and ultimately the market in other materials would contract as a consequence,

since the biomass market is legally obliged to expand, until the market came into equilibrium again.

This Doomsday scenario is based on the assumption that the timber supply market is finite and inelastic

because of the length of time it takes for trees to grow. However in fact it may well be that if an identifiable

transaction price was widely available through a trading exchange new sources of wood would become

available from currently unidentified or non-commercial sites which would increase the supply and bring the

market into equilibrium at both a lower price to the inelastic model and without the need for the other markets

to contract. This applies equally to the primary and the secondary raw material supplies.

The unpredicted increase in supply has been shown to occur in other fuel supplies such as oil, gas and coal

all of which are currently traded through exchanges with transparent transaction prices - as is carbon.

Bearing this in mind the development of a biomass exchange could be considered to be a vital component to

allow the timber industry to compete commercially in the fuel sector against other fuel suppliers.

3.5 Conclusion

The results of this consultation process established that the (wood energy) sector did not have any fundamental

concerns over the concept of a biomass trading system and in some cases there was considerable enthusiasm.

As anticipated it was apparent that for many businesses a biomass trading system was little understood and therefore

the extent of enthusiasm for such a system was initially variable, with some respondents indicating that they did not

see how it would help their business.

At the workshop and during the interviews we found that most companies expressed a willingness to consider using a

trading system alongside their current methods of buying or selling biomass.


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4.0A wood energy trading exchange

4.1 Trading issues

The introduction of a trading floor will require the initiation of standardised contracts to facilitate swift, secure, dispute

free trading. Further investigation is required as to what form that contract should take. Critical issues will be:

Collected or delivered:

When? next week, next month, next year?

What times are suitable for collection or delivery? what limitations should be imposed?

Who is responsible for loading or unloading?

What is access like? what restrictions are there on vehicles?

What is the likely turn around time? what limitations should be imposed?

What load size can be accepted? what delivery mechanism?

What happens if it is an imported delivery or the collection is exported?

Quality:

What size of chip?

What level of moisture is acceptable?

What level of contaminants is acceptable what are they?

What is unacceptable?

How is it measured?

When is it measured?

How can it be verified?

Payment:

In what currency?

How? electronically, cheques?

When? on delivery, on order, other?

When should deposits be paid? Be necessary?


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Default:

What are the late payment/delivery terms? Interest, penalties?

How to resolve disputes on quality?

What right of appeal?

To whom?

In addition to creating standard trading rules about how and when orders can be matched, how and when they can

be entered, when they should expire, how disputes with the trading floor should be resolved, etc.

4.2 How exchanges work

A typical set of web based entry options is illustrated below and the process is shown in more detail in appendix 7:

SELLER OF WOOD CHIP a typical price offer?

BIOMASS

TYPE

WOODCHIPS

PELLETS

BIOMASS

SPECIFICATION

MOISTURE CONTENT W40

PARTICLE SIZE G50

SOURCE OF WOOD VIRGIN SOFTWOOD

DENSITY S200

ASH CONTENT A1

DELIVERY

OPTIONS

SELF DISCHARGINGVEHICLES 120M3 WALKINGFLOORTIPPER

OTHER DOUBLE HOOK BINS

LOAD VOLUMES 21 TO 25 TONNESOVER 25 TONNES

CONTRACT DETAILS

DELIVERY DISTANCE TO SPECIFIEDPOSTCODES

PAYMENTMEASUREMENTODT

FREQUENCY/DURATION1 LOAD A WEEKMORE THAN 1 LOAD AWEEK

5 WEEKS OR OVER

PRICE

53.75/TONNE

2 WEEKS

Figure 29 Website front page

An internet based biomass trading floor is a forum in which buyers and sellers of biomass trade using a common set

of rules. As a result trading between multiple users is swift, simple and secure and enables buyers and sellers to buy

and sell at the best available prices. It also increases trading flexibility, certainty and price transparency which then

becomes the benchmark for material availability. The internet provides real time transaction information and allows

the market place to be taken to the market rather than everyone in the market having to come to a physical location.

Electronic communications provide an auditable trail of all transactions from order to final delivery.

The service is open to all so long as they meet eligibility criteria. Individual transactions are anonymous and

confidential although inevitably for a physical market the final delivery or collection point for the traded material is

known to the buying and selling counter-parties.


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Confidence in this regulated environment is provided by clear participation requirements whether that is regulatory,

financial, logistic or quality and an acceptance of the trading rules particularly the framework for resolving disputes.

Participants can either enter orders, time limited offers to buy and sell agreed volumes at given prices (to given

specifications and delivery locations within a specified time frame), over recorded telephone lines to market operators

or enter them direct into the website which allows them to view real time counter orders. Settlement and clearing of

payments and the overseeing of delivery of the material are integrated within the market place service.

The trading of wood chips and pellets is feasible at this stage as there are common specifications, other biomass

such as wastes, slurries and agricultural by products are not suited to this form of market place and have not been

considered by this study.

Successful sites (trading other commodities) work because they achieve a critical level of liquidity, the scale of

transaction volumes and continuous demand and supply that are required to enable the trading site to work

sustainably and to achieve credibility. This can take between 5 and 7 years to achieve.

Some advantages of a biomass trading system

The use of standardised contracts allows a transparent transaction price to be developed. This in turn can

be used as a benchmark to industry both to reflect supply or demand and informs and potentially stimulates

new or uncertain entrants or investment as necessary.

Common rules provide a level playing field for all businesses large or small introducing the ability to trade

flexibly at a low cost based on equal market knowledge.

Transparency of availability resolves short-term shortages of supply. Companies could use the trading

system to sell unused stock or to meet unexpected additional demand or shortfall of supply or meet

specifications that cannot be met in the short term. It might also solve haulage or production problems or aid

growth without new marketing investment.

The regulated environment provides a template for dispute resolution around fuel specifications, quantities

and other potential issues.

The participation criteria for an exchange can be used to raise standards. To achieve these standards will

require mentoring of both new entrants and current operators. While this potentially provides a barrier to

entry for those that are unwilling or unable to meet these standards, a commitment to meeting these

standards shows the intention of maintaining a long term relationship with the exchange and as a

consequence with all those that trade through it.

This can then be reflected through trading forward and future contracts which provide both counter-parties

with certainty of price and volume at a known date in the future. They do not provide a crystal ball of what

prices might be at any point in the future. Forward markets do reduce both price and supply risk. This

provides increased security to both the supply chain and the end market. This in turn will encourage the

sector to make longer term commitments and over time improve quality standards. The provision of a

forward price picture provides confidence to all and gives new market entrants reliable information with

which to plan.


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4.3 Anticipated challenges

To achieve critical liquidity the development of trading floor would need to overcome a series of challenges, these

include:

The sector is unable to distinguish between a market-place, a secure environment in which to trade, and a

broker, a competitor. As a result they are either unwilling to use it or they use it but are unwilling to place

market reflective orders.

The sector will not accept dispute resolution mechanisms. As a result confidence in the trading floor as a

secure environment to trade is eroded.

Identified commodities for trading are not actually traded in the open market as a result there is nothing to

trade through the market place.

Participation criteria and/or contractual obligations do not reflect (or improve on) underlying trading

conditions in the market and hence create a barrier to entry.

It would appear that in earlier attempts to provide a biomass trading exchange some or all of these challenges have

not been addressed but all can be overcome and have been in the past by:

effective consultation prior to launch,

the development of an efficient operational (IT) system

on-going communication and marketing post launch.

While integrity and confidentiality are critical at all times, the most important skill at launch is an effective marketing

campaign. To successfully achieve these ingredients to success leadership, time, sufficient funds and industry

support are required.

4.4 Outline business plan

Initially the biomass trading floor would provide market places for 3 commodities:

Conditioned woodchips for the heat market.

Low grade wood chips for the power market.

Pellets for both the heat and power market.

Its creation would be split into 3 phases:

Phase 1: Development of the trading database 6 months

Phase 2: Operation of the prototype 18 months

Phase 3: Achieving critical liquidity 36 to 60 months

Employment

Phase 1: Project Manager, 1 Market Development executive


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Phases 2 and 3: Project Manager, 3 Market Development executives

Phase 1 would require the development of:

A standardised contract, participation criteria and trading rules

An IT system to reflect these

A high profile campaign to launch the concept and encourage entrants.

Potential users to trade through the prototype

Phase 2 would last 18 months and would require:

The launch of the prototype

A high profile media campaign to launch the prototype and encourage new entrants.

Personal one to one relationship development and instruction to encourage trading by users

Settlement and delivery of all traded contracts

Provision of market information to users and the wider market through as appropriate the website, daily,

weekly and quarterly bulletins

Adjustment of the standardised contract, participation criteria and trading rules to reflect issues identified by

the users

Adjustment of the IT system to reflect these changes

Phase 3 would last 3 to 5 years and would require:

Launch of final system

Trading by users

Settlement and delivery of all traded contracts

Encouragement of additional users

Provision of market information to users and the wider market

Maintenance of rules and IT system as necessary

After phase 1 the most significant expense is employment costs of the project leader, two external marketing/sales

executives to encourage companies to join and one internal market operator to encourage participants to trade, As

the number of participants increase so the balance of these roles will alter. While it is possible to reduce or combine

these roles for reasons of financial expediency, to do so increases the risk that the period to achieve critical mass

either takes longer or is never achieved.


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5.0Costed proposals for the development of a trading floor

Based on the assumptions of the size of the market and the number of buyers and sellers outlined as the most

probable in section 1., the following costs for the development of a trading floor are proposed for years 1 3 (e.g. to

the end of the first operational year). By that stage it is assumed that 25% of the buyers and 60% of the sellers have

been recruited and3% of the total UK market for woodchips and pellets is traded through the biomass exchange.

The wider market will continue to use other means of trading such as through brokers or direct bi-lateral trading but

will accept that the exchange price is a credible reflection of the current market price at any moment in time and will

accept the exchanges quality and dispute resolution standards.

It is assumed that one market operator would manage 200 companies, either buyers or sellers, with a database

established which allows any market operator to take responsibility for any participant or prospective participant. As

time develops the emphasis will move from external marketing to encourage participants to join to internal marketing

to encourage participants to trade. At all times market operators will act in the best interests of both their clients and

the market to ensure that a fair and orderly market and a credible price are maintained. It is assumed that a market

development executive/market operator would be paid 25,000 per annum. It is assumed that there will be a senior

development executive who will be responsible for managing the complete project including co-ordinating the media

and marketing campaign who will be paid 35,000 per annum. Employment costs (NI, pension, PHI and life

insurance) equate to a further 33.33%. Overheads such as overall project management, marketing literature,

advertising, accommodation, heat, light, travel, subsistence, settlement, accounting and legal services have been

bulked together at 12,500 per head per annum. IT maintenance services are included in these overheads but

development costs will be additional. An estimate of 75,000 has been allocated in year one for the development of

the trading database and the complimentary database of contacts.

It is envisaged that initial trading would be free to participants to encourage take up. In time confidence in the system

would increase sufficiently to establish trading volumes that would be high enough to introduce fees and make the

system self sustaining. Experience from launching previous trading floors suggests that this might take several years.

In these assumptions we plan to introduce a trading fee of 1.00 per tonne in year 3. This will be split equally

between the buyer and the seller and will only be charged on the successful completion of the contract.

Daily, weekly and monthly bulletins are distributed to participants and a quarterly information bulletin is distributed to

the wider market as well as a fully operational website with the ability to trade interactively/on-line. A high profile

media campaign would be maintained as would one to one telephone and on site marketing and instruction by the

development team/market operators.

The assumption is that consultants would ensure that potential participants met the participation criteria for the

trading floor and would be paid for by the potential participants. Hence the trading floor would solely be accepting

participants upon the recommendation of these consultants that would have been pre-trained to understand the

standards required and in particular the quality and verification criteria for the commodity. The table below shows a

potential spend profile10

.

10A detailed breakdown of prospective participants and market operators can be seen at Appendix 8


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Year 2010 2011 2012 Cumu

Tonnage

Market penetration 0.83% 1.67% 2.96%

Woodchip 25,504 56,253 113,859

Pellets 1,628 3,591 7,268

Total Tonnage 27,132 59,843 121,126 208,101

Charge per tonne - - 1.00

Total Income - - 121,126.25 121,126.25

Buyers

Market penetration 10% 15% 25%

Take up 126 207 395

Sellers

Market penetration 20% 40% 60%

Take up 123 245 368

Total participants 248 452 763

Expenses

Employment Number Cost

Project Manager 1 35,000.00 35,000.00 35,000.00 35,000.00 105,000.00

Market Operators 3 25,000.00 50,000.00 75,000.00 75,000.00 200,000.00

Total salary costs 4 85,000.00 110,000.00 110,000.00 305,000.00

Employment overheads 33.33% 28,333.33 36,666.67 36,666.67 101,666.67

Total employment costs 113,333.33 146,666.67 146,666.67 406,666.67

Operational overhead 12,500.00 37,500.00 50,000.00 50,000.00 137,500.00

IT Development 75,000.00 75,000.00 75,000.00

Total expenses 225,833.33 196,666.67 196,666.67 619,166.67

Net profit - 225,833.33 - 196,666.67 - 75,540.41 - 498,040.41

Figure 30 Cost plan

As can be seen the development of a trading platform could require funding over a number of years and in a prudent

scenario as shown above 500,000 of support funding in the first 3 years. Overall it is anticipated the cost of reaching

a critical mass is in the region of 1million over 7 years, although a decision to close or significantly alter the project

could be made after year 2.

Preliminary investigation suggests that this might be partially secured through SRDP, KTP or EU funds but further

investigation is required. Private sector finance support could contribute to these costs as well. If critical mass is

achieved these funds could be repaid by year 10.

The cost could be reduced (or income generated earlier) if once it is developed, the sector committed early to trading

contracts through the market-place.


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Appendix 1: Market based use estimates

The table below, which we have compiled for this report, shows from a simple snap shot of announced biomass

projects in Scotland that potential demand could rise to over 8.6 million tonnes.

Development Status\comments Use tonnes pa

44MW electricity Eon Lockerbie Operational 500,000

25MW CHP UPM Shotton Operational 40,000

8MW CHP Balcas Invergordon Under development 20,000 (e)

25MW electricity Scottish Power Longanett Planned 70,000 (e)

Longanett and Cockenzie co-fire Formerly operational ?

15MW Scottish public sector heat Operational 15,000 (e)

Puffin Pellets - Banffshire Under development for 25,000t of pellets 75,000 (e)

Brites Pellets - Balcas Invergordon Under development for 100,000t of pellets 300,000 (e)

Arbuthnott Wood Pellets - Kincardinshire Under development for 15,000t of pellets 45,000 (e)

Domestic logs FCS figures using population proxy 40,000 (e)

Hunterston - Ayrshire Planned cofire 1,500,000 (e)

SSE\Forth Ports Announced 1billion x 4 100MW plants Dundee, Rosyth, Grangemouth, Leith

4,000,000 (e)

Scottish heat market by 2020 Forecast low 2,000,000 (e)

Combined total 8,605,000

Other use estimates deploy different methods for forecasting use. For example Scotlands Climate Change

Programme estimates that 0.75m green tonnes of wood will be used for bioenergy by 2010, rising to 1 million green

tonnes by 2020.

Another recently published source of information is shown in the table below (produced by Hawkins Wright in summer

2009). Using this estimate 20 million tonnes of wood chips would be needed for the UK power market.


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We are also aware of other research (not yet published) that indicates new UK based planned projects could use as

much as 34.5 million tonnes of wood energy, with 11 million tonnes more likely. The same research estimates that

current use is 3.25 million tonnes a year (with a further 2.8 million tonnes being co-fired at Drax via imported

biomass).


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Appendix 2: Forecast of prospective users

The tables below are based upon the volumes forecast in this report. They assume that in the heat market a typical

buyer is purchasing 1,000 tonnes per contract (effectively a year) in the heat market and 100,000 tonnes per contract (a

year) in the power market. A typical seller might mange 5 1000 tonne contracts a year, but in the power market sellers

and buyers are equal due to the large volumes.

High, medium and low forecast UK buyers to 2020

UK- High Heat Power


000 tonnes perannum

Buyers Buyers Buyers Buyers

1 1 100 100

2010 1,358 87 17 1

2011 2,538 162 32 2

2012 2,905 185 36 2

2013 3,273 209 41 32014 3,641 232 46 3

2015 4,008 256 50 3

2016 4,376 279 55 3

2017 4,594 293 57 4

2018 4,813 307 60 4

2019 6,016 384 75 5

2020 7,520 480 94 6

UK- Medium Heat Power

YearChips Pellets Chips Pellets

000 tonnes perannum

Buyers Buyers Buyers Buyers

1 1 100 100

2010 1,161 74 19 1

2011 1,277 82 21 1

2012 1,462 93 24 2

2013 1,647 105 27 2

2014 1,832 117 30 2

2015 2,017 129 33 2

2016 2,202 141 36 2

2017 2,312 148 38 22018 2,422 155 40 3

2019 3,027 193 49 3

2020 3,784 242 62 4

UK- Low Heat Power


000 tonnes per Buyers Buyers Buyers Buyers


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annum 1 1 100 100

2010 436 28 26 2

2011 436 28 26 2

2012 436 28 26 2

2013 436 28 26 2

2014 455 29 27 2

2015 501 32 30 2

2016 547 35 33 2

2017 574 37 34 2

2018 602 38 36 2

2019 752 48 45 3

2020 940 60 56 4

High, medium and low forecast Scottish buyers to 2020

Scotland - HighHeat Power

Chips Pellets Chips Pellets

Year Buyers Buyers Buyers Buyers

000 tonnes perannum

1 1 100 100

2010 160 40 7 1

2011 384 96 18 1

2012 448 112 21 2

2013 544 136 25 2

2014 640 160 30 2

2015 800 200 37 3

2016 960 240 44 4

2017 1,120 280 52 4

2018 1,280 320 59 5

2019 1,440 360 67 5

2020 1,600 400 74 6

Scotland - MediumHeat Power



000 tonnes perannum

1 1 100 100

2010 160 40 7 1

2011 192 48 9 1

2012 224 56 10 1

2013 272 68 13 1

2014 320 80 15 1

2015 400 100 19 2

2016 480 120 22 2

2017 560 140 26 2


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2018 640 160 30 2

2019 720 180 33 3

2020 800 200 37 3

Scotland - LowHeat Power



000 tonnes perannum

1 1 100 100

2010 160 40 7 1

2011 168 42 8 1

2012 176 44 8 1

2013 184 46 9 1

2014 192 48 9 1

2015 200 50 9 1

2016 208 52 10 1

2017 216 54 10 1

2018 224 56 10 1

2019 232 58 11 1

2020 240 60 11 1

High, medium and low forecast UK sellers by 2020

UK- High Heat Power


000 tonnesper annum

Sellers Importers Sellers Importers Sellers Importers Sellers Importers

5 5 5 5 100 100 100 100

2010 244 27 16 2 15 2 1 0

2011 436 71 28 5 27 4 2 0

2012 476 105 30 7 30 7 2 0

2013 511 144 33 9 32 9 2 1

2014 539 189 34 12 34 12 2 1

2015 561 241 36 15 35 15 2 1

2016 578 298 37 19 36 19 2 1

2017 570 349 36 22 36 22 2 1

2018 558 404 36 26 35 25 2 2

2019 650 553 41 35 41 35 3 2

2020 752 752 48 48 47 47 3 3

UK- Medium Heat Power


000 tonnesper annum


5 5 5 5 100 100 100 100

2010 209 23 13 1 17 2 1 0

2011 220 36 14 2 18 3 1 0


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2012 240 53 15 3 20 4 1 0

2013 257 72 16 5 21 6 1 0

2014 271 95 17 6 22 8 1 0

2015 282 121 18 8 23 10 1 1

2016 291 150 19 10 24 12 2 1

2017 287 176 18 11 23 14 1 1

2018 281 203 18 13 23 17 1 1

2019 327 279 21 18 27 23 2 1

2020 378 378 24 24 31 31 2 2

UK- Low Heat Power


000 tonnesper annum


5 5 5 5 100 100 100 100

2010 79 9 5 1 24 3 2 0

2011 75 12 5 1 23 4 1 0

2012 72 16 5 1 21 5 1 0

2013 68 19 4 1 20 6 1 0

2014 67 24 4 2 20 7 1 0

2015 70 30 4 2 21 9 1 1

2016 72 37 5 2 22 11 1 1

2017 71 44 5 3 21 13 1 1

2018 70 51 4 3 21 15 1 1

2019 81 69 5 4 24 21 2 1

2020 94 94 6 6 28 28 2 2

High, medium and low forecast Scottish sellers by 2020

Scotland -High

Heat Power


Year Sellers Importers Sellers Importers Sellers Importers Sellers Importers

000 tonnesper annum

5 5 5 5 100 100 100 100

2010 29 3 7 1 7 1 1 0

2011 66 11 17 3 15 2 1 0

2012 73 16 18 4 17 4 1 0

2013 85 24 21 6 20 6 2 0

2014 95 33 24 8 22 8 2 1

2015 112 48 28 12 26 11 2 1

2016 127 65 32 16 29 15 2 1

2017 139 85 35 21 32 20 3 2

2018 148 108 37 27 34 25 3 2

2019 156 132 39 33 36 31 3 2

2020 160 160 40 40 37 37 3 3


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Scotland -Medium

Heat Power



000 tonnesper annum

5 5 5 5 100 100 100 100

2010 29 3 7 17 1 1 0

2011 33 5 8 1 8 1 1 0

2012 37 8 9 2 8 2 1 0

2013 42 12 11 3 10 3 1 0

2014 47 17 12 4 11 4 1 0

2015 56 24 14 6 13 6 1 0

2016 63 33 16 8 15 8 1 1

2017 69 43 17 11 16 10 1 1

2018 74 54 19 13 17 12 1 1

2019 78 66 19 17 18 15 1 1

2020 80 80 20 20 19 19 2 2

Scotland -Low

Heat Power



000 tonnesper annum

5 5 5 5 100 100 100 100

2010 29 3 7 1 7 1 1 0

2011 29 5 7 1 7 1 1 0

2012 29 6 7 2 7 1 1 0

2013 29 8 7 27 2 1 0

2014 28 10 7 2 7 2 1 0

2015 28 12 7 3 6 3 1 0

2016 27 14 7 4 6 3 1 0

2017 27 16 7 4 6 4 1 0

2018 26 19 6 5 6 4 0 0

2019 25 21 6 5 6 5 0 0

2020 24 24 6 6 6 6 0 0


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Appendix 3: List of companies surveyed

Company Name Email

Arbuthnott Wood Pellets Ltd Keith Arbuthnott [email protected]

Andrew Nicol Andrew Nicol [email protected]

Angus Biofuels Bill Watson [email protected]

Alvie Estate Jamie Williamson [email protected]

Arniston Energy Ltd John Goffin [email protected]

AW Jenkinson Forest Products Angie McArthur [email protected]

Ayrshire and Arran Health Board Iain McInally [email protected]

Balcas Ltd Alistair McGlynn [email protected]

Binn Skips Ltd John Ferguson [email protected]

BSW Sawmills Ltd Andrew Smith [email protected]

Buccleuch Natural Fuels Ltd Andy Wiseman [email protected]

Callendar Estate Iain Ross [email protected]

Charlesfield First LLP Iain MacKinnon [email protected]

Confor Jamie Farquhar [email protected]

D J Laing (Contracts) Ltd [email protected]

E.ON UK Plc Philip Wallace [email protected]

Econergy Ltd [email protected]

Egger (Barony) Ltd Mark Hayton [email protected]

Euro

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